Internet Everything: The Coming War for the Consumer

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Consumer media, communications and commerce applications are being subsumed by the Internet. The simultaneous rise of smart devices, connected home electronics, fast wireless networks, content delivery networks and compelling cloud-based applications is fomenting a revolution in consumer internet use.  No longer tied to the desktop or shackled by poor performance, consumers are shifting media consumption – e.g. video and audio streaming, on-line publishing, Twitter, etc. – communications – e.g. text, email, Facebook, Skype, FaceTime, etc. – and commerce – e.g. Amazon, eBay, Groupon, etc. – to the web at an accelerated pace

This evolutionary shift creates the need for “home pages” that enable choice, navigation and payments. Explosive growth content on the internet raises a challenge for consumers – how to identify desirable, access and pay for it.  We do not believe that a “one stop shop” can aggregate sufficient content, as the owners of valuable content are disparate, powerful and increasingly wary of the traditional aggregation model.  Rather, we expect a wide array of independent content shops to arise, operated by or on the behalf of studios, sports organizations, branded channels, independent producers, etc., each with their own programming and payment mechanisms – i.e. subscription, pay-per-view, or advertising supported.  This will create complexity for users, the impetus for “home page” services, or “meta-aggregators” that give users tools to find, view and pay for content

The meta-aggregator role will be lucrative, monetized via advertising, transaction fees, and proprietary services. Rather than aggregating all content under one brand, meta-aggregators will link through to content owned by others.  The meta-aggregator will have search and display advertising opportunities, may earn a portion of transaction fees for subscription or pay-per-view content, and will be able to offer services of their own to consumers – e.g. e-commerce, social networking, etc. – and to content owners – e.g. marketing services, hosting, transaction processing, consumer profiles.  Like most on-line businesses, we expect the “home page” role to have natural economies of scale that will be substantial barriers to entry once leadership positions are established

Key Success Factors: Brand, Navigation Tools, Content Delivery Infrastructure, Advertising Skills, Transaction Processing, User Profiles, Relationships with Content Owners. Successful meta-aggregators will need specific assets and skills.  First, an on-line brand must be leveraged or established.  Second, a successful meta-aggregator should have powerful and easy to use tools to find and select content – e.g. search and recommendation engines, expert curation, etc.  Next, the content must be served to the consumer with high speed and reliability over an extensive CDN with cloud hosting capability, either owned or under contract.  Furthermore, leading players will have the ability to design, sell and serve on-line advertising, across formats and geographies, and to profile users for advertisers and content owners.  In addition, the ability to present, accept and process commercial transactions will be important.  Finally, leaders will need to establish constructive working relationships with the most important owners of content

Apple, Amazon, Google, and Facebook appear advantaged. Apple – Pros: unassailable retail brand, dominates music distribution, building navigation and advertising skills.  Cons: reliance on commercial CDNs, distrust of content owners.  Amazon – Pros: good on-line brand, existing transaction relationships and processing capability, recommendation engine tool, strong CDN and cloud hosting operation.  Cons: behind in advertising.  Google – Pros: dominant search and video brands, most advanced CDN/hosting capability, #1 Internet advertising player, strong user tracking.  Cons: behind in transaction processing, distrust of content owners.  Facebook – Pros: powerful, sticky and growing on-line brand, extensive user profiling, strong CDN/hosting capability.  Cons: behind in advertising and navigation tools, no transaction processing or content relationships

Traditional leaders in media, communications and computing are not well positioned to play this role. Others aspire to the meta-aggregator role, but we are not optimistic.  Cable Operators – Pros: existing customer base, infrastructure “in territory”, transaction processing and advertising capabilities.  Cons: terrible brand image, lacking on-line presence or navigation tools, must defend existing franchise, reticent to attack out of franchise, contentious relationships with content owners.    Content Owners – Pros: control of a fragment of content, modest on-line brands, advertising skills.  Cons: no CDN, no navigation tools, no transaction capabilities, competitive positioning vs. all other content owners makes consortium approach inherently unstable.  Netflix – Pros: first mover brand advantage.  Cons: poor navigation tools, no CDN/hosting or advertising, weak user profiling and transaction processing, one-stop subscription model relies on content contracts.  Microsoft/Yahoo –deteriorating position vs. Apple, Amazon, Google and Facebook

Some will “win” and some will “lose” – We like Google’s chances. While we expect the top four to all have a credible play as meta-aggregators, we see Google as the likely leader.  The growing strength of Android and Chrome across fixed and mobile platforms ties an eco-system of hardware and software suppliers to Google’s ambitions as a meta-aggregator.  This and the company’s breadth of excellence across the key success factors make it the best positioned company against the opportunity.  As in smartphones, we believe Apple’s focus on margins and brand exclusivity will limit its eventual market share as a meta-aggregator.  We are also concerned that reliance on partners for serving video could be an Achilles heel vs. CDN leader Google.  Facebook and Amazon appear behind the top two, but have important assets and could surprise, particularly if Google and/or Apple misstep

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